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Piggybacking Mechanics: Whatsapp, Instagram And Network Effect Marketing

Welcome to the age of the zero-dollar marketing startup. WhatsApp, and earlier Instagram, have officially become a permanent part of startup lore for having built multi-billion dollar businesses without (reportedly) spending a dime on marketing.

Meanwhile, Airbnb has grown from a hipster community of mattress-renters to the world’s largest provider of accommodations without spending even a fraction of what traditional hotel chains spend in marketing.

Marketing is dead! Or that’s what many would have you believe. A great product sells itself, of course! Fire the marketing team!

Well… not quite!

The fastest growing networks on the internet – Airbnb, Instagram, Facebook, YouTube, Snapchat – may not have spent much on marketing, but they all have one thing in common: Each of these networks piggybacked on top of another pre-existing network.

Facebook and Bebo grew on top of the network embedded in our email. Many networks, including Instagram, grew on top of Facebook itself. For a while, Airbnb grew on top of Craigslist, while Snapchat and WhatsApp have leveraged the mobile phone’s organic network, the phone book, to create networks native to mobile,

If you’re building a social network, marketplace or platform and you haven’t considered piggybacking on a network, you need to think again.

Much so-called ‘growth hacking’ relies on testing of cause-and-effect and optimization of funnel conversions. But in the early days of a network or a marketplace, startups are faced with a radically different problem. Why will users come on board when there’s no one else there? Why will producers set up shop in a marketplace that is not yet frequented by consumers and vice versa?

The classic chicken and egg problem cannot be solved by pulling in users and optimizing conversions. Before network effects set in, users will neither get activated nor will they get engaged.

Set a network to catch a network

To grow a network, you need to think like a network. To get enough users on board to create network effects, you need to piggyback upon another network. Piggybacking on a thriving network works wonderfully as long as your platform is complementary to that network and delivers additional value to the users there.

As far as growth strategies go, there are few strategies that are more scalable and sustainable as engines of growth.

Paypal got almost all its traction by piggybacking on eBay and offering a much superior payment method than the painful check-over-mail. It solved the pain points around payment on eBay providing instant payments without the hassle of credit cards and assuming much of the risk of online fraud.

Soon enough, Paypal was the predominant mode of payments on eBay and rode its growth to become synonymous with online payments.

But not all piggybacking stories end happily ever after. Apps that have leveraged Facebook to grow aggressively, have found their business jeopardized with a change in Facebook’s news feed algorithm. Startups that tried to emulate Airbnb and siphon users away from Craigslist were sent cease and desist letters. Even Paypal was banned on eBay for a while before the marketplace had to accede to the wishes of the users.

So what does it take to successfully piggyback a network?

The Biology of Piggybacking

Successfully piggybacking a network is more complex than simply choosing a network and executing an API integration. A startup looking to piggyback on an underlying network needs to understand the nature of its relationship with that network.

Borrowing analogies from biological systems, there are three types of relationships between your startup (the Guest) and the underlying network (the Host).

The Happy Clownfish

In certain cases, a partnership model may be initiated by the Host i.e. the underlying network.

Much like how colorful clownfish (Guest) inhabit sea anemones (Hosts) whereby each party gains protection from their respective predators, both networks benefit from each other.

For example, Facebook’s partnership with Spotify, following its launch of frictionless sharing, is designed in a way that both Facebook and Spotify benefit.

Facebook needed greater engagement among users and Spotify needed listeners, even though the implementation of frictionless sharing has much that can be improved. Earlier, Zynga, Slide and RockYou benefited from a similar relationship with Facebook, piggybacking on Facebook for growth by providing value to Facebook users, while improving user engagement and retention on Facebook.

The Hitchhiking Remora

Not all networks may initiate partnerships the way Facebook did. In fact, most don’t.

In such cases, it is the prerogative of the guest (your startup) to be backward compatible with the host, much like a remora attaching itself onto a shark and feeding off it, you need to figure out a way to embed your functionality in the host network.

YouTube gained early traction by piggybacking on MySpace. Engagement on MySpace was built around musicians who needed a way to showcase their talent. At the time, online video was broken. YouTube fixed that with its flash-based one-click video experience and MySpace users finally had an answer to their problems.

Flickr solved the pain of sharing pictures in the blogosphere. Every blogger putting up a picture on his blog helped showcase the service to others. Flickr rapidly grew to become the fifth most visited website on the internet by the time Yahoo lapped it up.

As these examples demonstrate, these relationships start without an explicit partnership. The Guest makes a conscious decision to make its functionality and content embeddable in the Host network. If such embedding solves a key user pain point, the users start embedding Guest functionality into the Host network, driving adoption. The chicken and egg problem is solved as more users on the Host get exposed to this functionality and migrate to start using the Guest’s functionality.

The Bloodsucking Parasite

Finally, some networks may actively discourage any form of guest-host relationship. In these cases, the startup needs to reverse-engineer an integration with the host. Such piggybacking is generally non-consensual.

Airbnb reverse-engineered a de facto ‘integration’ with Craigslist and offered users on Craigslist, an alternate, more convenient and safer destination for their interactions. Airbnb stole the network interactions away from Craigslist and was promptly blocked by the Host as soon as it realized what was afoot.

Skype, Viber and WhatsApp have similar relationships with carriers where they piggyback the connections created by the carriers (via the user’s phone book) to provide an alternate communication channel.

Viber rode this success to a $900M acquisition recently,and WhatsApp was acquired by Facebook for $19 billion in cash and stock.

Sidenote: It is interesting to note Skype, Viber, and WhatsApp are able to arbitrage users because of a lack of effective carrier data discrimination. That is to say, carriers are well aware of WhatsApp allowing users an end-around onerous SMS fees, but feel powerless – at this point in time – to raise network data rates to make it unprofitable for WhatsApp, forcing users back to SMS.

How To Succeed With Piggybacking

While piggybacking may seem attractive, startups need to be aware of the relationship they have with the host network and pursue strategies accordingly.

More importantly, not all piggybacking is successful. The stories above suffer from survivorship bias and are useful only when understood in the context of the factors that dictated their success and spelt failure for other startups that tried similar strategies.

In general, everyone wins in The Happy Clownfish scenario.

But in most Hitchhiking Remora relationships, the Host controls the relationship with the piggybacking Guest. This is specifically the case whenever the Host launches an open-access API upon which startups build off that to access the Host’s network. While remora may add value by plucking parasites, fickle sharks have been known to bait-and-switch and devour orbiting remoras.

The Bloodsucking Parasite relationship is a lot easier to anticipate and is always antagonistic. In most cases, it triggers an instant immune system response, which, translating to business, amounts to legal action.

The only long-term sustainable network-piggybacking, then, is the Happy Clownfish. Both the clownfish and the sea anemone need each other. Their respective physiologies are a clue. A clownfish will never grow poisonous tentacles to sting potential predators and a sea anemone will never grow fins to swim.

To be a clownfish in a sea anemone, your network needs to provide high-contrast, high-value-add differentiation with significant barriers to entry, otherwise you risk coming across like one of thousands of commoditized remoras. Facebook doesn’t want to build its own music library and Spotify isn’t interested in connecting the world outside of music.

There are three factors that determine success with piggybacking:

1. If the host explicitly calls for piggybackers, be the first to the party

When Facebook opened its platform to external developers, Zynga jumped on board and gained rapid adoption. Many startups that followed failed to get such adoption because users had become more sophisticated to the viral invites by that time and Facebook, as well, started dampening the spread of these invites subsequently.

Being the first to the party helps to get users deeply engaged before they get sophisticated and start ignoring messages from other services that follow.

Be the first clownfish to get to your sea anemone.

2. If you can build for backward compatibility, ensure you add value to the underlying platform

YouTube solved a problem for MySpace bands. Flickr solved a problem for bloggers. Paypal solved multiple pain points for buyers and sellers on eBay. Be the useful remora that eats the little parasites on the shark.

3. Be the first to reverse-engineer before the host wises up

When stealing traction parasitically, it pays to be the first to discover the chink in the armor of host network. Airbnb gained traction before Craigslist wisened up. But every startup that has tried that strategy subsequently has failed to replicate the same success and has instead been caught in a legal quagmire.

Being first to piggyback a host network is the most important determiner of success. There is typically a time window while these strategies work. And almost always, first-to-the-party wins. When the host wants you to piggyback, there’s a window while it will be effective. When the host doesn’t want it, there’s a window before which the host wises up. In either case, being first helps.

The story of many of today’s large social networks and marketplaces follows similar trajectories. Bringing in users through linear funnel hacking tactics often prove counter-productive. Finding a new network and piggybacking it helps gain traction among enough users simultaneously and build network effects.

So the next time you hear about a startup boasting a zero dollar marketing budget and putting it all on building a great product, think again! Piggybacking is the new marketing for the age of the network effect.

Note: This article  first appeared on TheNextWeb. This article was co-authored with Patrick Vlaskovits, the NY Times BestSelling Author of The Lean Entrepreneur.

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Why Business Models Fail: Pipes Vs. Platforms

Why do most social networks never take off?

Why are marketplaces such difficult businesses?

Why do startups with the best technology fail so often?

There are two broad business models: pipes and platforms. You could be running your startup the wrong way if you’re building a platform, but using pipe strategies.

More on that soon, but first a few definitions.

PIPES
Pipes have been around us for the last 400 years. They’ve been the dominant model of business. Firms create stuff, push them out and sell them to customers. Value is produced upstream and consumed downstream. There is a linear flow, much like water flowing through a pipe.

We see pipes everywhere. Every consumer good that we use essentially comes to us via a pipe. All of manufacturing runs on a pipe model.  Television and Radio are pipes spewing out content at us. Our education system is a pipe where teachers push out their ‘knowledge’ to children. Prior to the internet, much of the services industry ran on the pipe model as well.

This model was brought over to the internet as well. Blogs run on a pipe model. An ecommerce store like Zappos works as a pipe as well. Single-user SAAS runs on pipe model where the software is created by the business and delivered on a pay-as-you-use model to the consumer.

PLATFORMS
Had the internet not come up, we would never have seen the emergence of platform business models. Unlike pipes, platforms do not just create and push stuff out. They allow users to create and consume value. At the technology layer, external developers can extend platform functionality using APIs. At the business layer, users (producers) can create value on the platform for other users (consumers) to consume. This is a massive shift from any form of business we have ever known in our industrial hangover.

TV Channels work on a Pipe model but YouTube works on a Platform model. Encyclopaedia Britannica worked on a Pipe model but Wikipedia has flipped it and built value on a Platform model. Our classrooms still work on a Pipe model but Udemy and Skillshare are turning on the Platform model for education.

BUSINESS MODEL FAILURE
So why is the distinction important?

Platforms are a fundamentally different business model. If you go about building a platform the way you would build a pipe, you are probably setting yourself up for failure.

We’ve been building pipes for the last few centuries and we often tend to bring over that execution model to building platforms. The media industry is struggling to come to terms with the fact that the model has shifted. Traditional retail, a pipe, is being disrupted by the rise of marketplaces and in-store technology, which work on the platform model. 

PIPE THINKING VS. PLATFORM THINKING
So how do you avoid this as an entrepreneur?

Here’s a quick summary of the ways that these two models of building businesses are different from each other.

USER ACQUISITION
User acquisition is fairly straightforward for pipes. You get users in and convert them to transact. Much like driving footfalls into a retail store and converting them, online stores also focus on getting users in and converting them.

Many platforms launch and follow pipe-tactics like the above. Getting users in, and trying to convert them to certain actions. However, platforms often have no value when the first few users come in. They suffer from a chicken and egg problem, which I talk extensively about on this blog. Users (as producers) typically produce value for other users (consumers). Producers upload photos on Flickr and product listings on eBay, which consumers consume. Hence, without producers there is no value for consumers and without consumers, there is no value for producers.

Platforms have two key challenges:

1. Solving the chicken and egg problem to get both producers and consumers on board

2. Ensuring that producers produce, and create value

Without solving for these two challenges, driving site traffic or app downloads will not help with user acquisition.

Startups often fail when they are actually building platforms but use Pipe Thinking for user acquisition.

Pipe Thinking: Optimize conversion funnels to grow.

Platform Thinking: Build network effects before you optimize conversions. 

PRODUCT DESIGN AND MANAGEMENT
Creating a pipe is very different from creating a platform.

Creating a pipe requires us to build with the consumer in mind. An online travel agent like Kayak.com is a pipe that allows users to consume air lie tickets. All features are built with a view to enable consumers to find and consume airline tickets.

In contrast, a platform requires us to build with both producers and consumers in mind. Building YouTube, Dribbble or AirBnB requires us to build tools for producers (e.g. video hosting on YouTube) as well as for consumers (e.g. video viewing, voting etc.). Keeping two separate lenses helps us build out the right features.

The use cases for pipes are usually well established. The use cases for platforms, sometimes, emerge through usage. E.g. Twitter developed many use cases over time. It started off as something which allowed you to express yourself within the constraints of 140 characters (hardly useful?), moved to a platform for sharing and consuming news and content and ultimately created an entirely new model for consuming trending topics. Users often take platforms in surprisingly new directions. There’s only so much that customer development helps your with. 

Pipe Thinking: Our users interact with software we create. Our product is valuable of itself.

Platform Thinking: Our users interact with each other, using software we create. Our product has no value unless users use it.

MONETIZATION
Monetization for a pipe, again, is straightforward. You calculate all the costs of running a unit through a pipe all the way to the end consumer and you ensure that Price = Cost + Desired Margin. This is an over-simplification of the intricate art of pricing, but it captures the fact that the customer is typically the one consuming value created by the business.

On a platform business, monetization isn’t quite as straightforward. When producers and consumers transact (e.g. AirBnB, SitterCity, Etsy), one or both sides pays the platform a transaction cut. When producers create content to engage consumers  (YouTube), the platform may monetize consumer attention (through advertising). In some cases, platforms may license API usage.

Platform economics isn’t quite as straightforward either. At least one side is usually subsidized to participate on the platform. Producers may even be incentivized to participate. For pipes, a simple formula helps understand monetization:

Customer Acquisition Cost (CAC) < Life TIme Value (LTV)

This formula works extremely well for ecommerce shops or subscription plays. On platforms, more of a systems view is needed to balance out subsidies and prices, and determine the traction needed on either side for the business model to work. 

Pipe Thinking: We charge consumers for value we create.

Platform Thinking: We’ve got to figure who creates value and who we charge for that. 

BUT… PLATFORM THINKING APPLIES TO ALL INTERNET BUSINESSES
If the internet hadn’t happened, we would still be in a world dominated by pipes. The internet, being a participatory network, is a platform itself and allows any business, building on top of it, to leverage these platform properties.

Every business on the internet has some Platform properties.

I did mention earlier that blogs, ecommerce stores and single-user SAAS work on pipe models. However, by virtue of the fact that they are internet-enabled, even they have elements that make them platform-like.  Blogs allow comments and discussions. The main interaction involves the blogger pushing content to the reader, but secondary interactions (like comments) lend a blog some of the characteristics of platforms. Readers co-create value.

Ecommerce sites have reviews created by users, again an ‘intelligent’ platform model.

THE END OF PIPES

In the future, every company will be a tech company. We already see this change around us as companies move to restructure their business models in a way that uses data to create value.

We are moving from linear to networked business models, from dumb pipes to intelligent platforms. All businesses will need to move to this new model at some point, or risk being disrupted by platforms that do.

Note: I intend to use some/all of the ideas here as part of an introductory chapter to the book I’m working on and would love to have your feedback and comments.

This article was first featured on Sangeet’s blog, Platform Thinking (http://platformed.info). Platform Thinking has been ranked among the top blogs for startups, globally, by the Harvard Business School Centre for Entrepreneurship

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The network effect playbook: Social products win with utility, not invites

The proverbial chicken and egg problem of building a new social product is well understood among tech startups, and it’s been commonplace to follow two contrasting mechanisms for getting traction.

Traditionally, startups have solved this problem by racing to connect users with each other, essentially providing them the pipes to interact with each other. Twitter, Facebook and LinkedIn have grown big with this connection-first model.

However, a new breed of networks is gaining ground with the content-first model. They provide users with tools to create a corpus of content, and then enable conversations around that content. Behance, Pinterest, Instagram, Dribble, Scoop.It have all gained traction by building a corpus of content before building a social network.

The two contrasting approaches are summarized below:

The rules of building a social product are changing. It’s important to understand this shift to build social products that can effectively gain traction on the internet today.The connection-first model is no longer as effective as it used to be. As the social web grows, and a larger number of social products compete for our attention, we are seeing a dramatic shift towards the content-first model. If you’re still getting users to send out Facebook invites, you’re adding to the noise, instead of standing out and getting noticed.

The Connections-first Social Product

Traditionally, the playbook for building network effects has been the following: Get users on board, connect them to each other and have them create content and conversations.

Social networks like Bebo, Facebook and Twitter used this playbook to create their respective networks leveraging address-book integrations and other hacks to rapidly build a large number of network connections.

The importance of building connections, in this model, cannot be emphasized enough. In fact, the growth teams at Facebook, Twitter and LinkedIn specifically aim for ‘X connections for a user within Y days of sign-up’ to activate the user.

Since a critical mass of connections is required before users experience value, the key to building a successful network is minimizing the friction in creating connections. Contact-list integration helped social networks like Facebook and LinkedIn gain initial traction through the removal of sign-up friction.

In spite of growth hacks like contact-list integration, there is always a lead time in getting users on board and reaching critical mass. This is the ‘gap’ where it becomes very difficult to demonstrate value in using the product.

Frictionless sign-up + Virality = Network Effects? Or not!
Startups often believe that removing friction in sign-up and creating some form of viral acquisition are the two key elements to reaching critical mass. In fact, with the rise of Facebook Connect and the social graph, a large number of social products have sprung up on the promise of frictionless sign-up and viral growth. However, users on the internet have limited time and attention. As more startups leverage the social graph and flood users with invitations to join their networks, users have started to develop invite fatigue.

Clearly, frictionless sign-up and virality are not the one-stop solutions we were hoping they would be.

The secret to network value
Startups often fail to appreciate the gap between technology and value proposition. For products like Evernote, technology serves the entire value proposition. However, for social products, the value proposition is a combination of technology and the content that users create on top of it. YouTube’s value lies in its hosting and streaming capability, but more importantly in its vast repository of videos.

The secret to creating a social product that demonstrates immediate value is to enable content before creating the network.

Content created on the network is the new source of competitive advantage. The videos on YouTube, the pictures on Instagram, the answers on Quora are the primary source of value for users and the key driver of competitive advantage for these platforms.

The Content-first Social Product

Today’s social startups don’t start off as networks. They start off as standalone apps. These products enable users to create a corpus of content first. They then connect the users with each other as a consequence of sharing that content.

Instagram started out as a photo-taking tool and built itself out into a social network subsequently. The initial focus was entirely on the creation of content and the connections were formed over time leveraging other social networks. It is unlikely that Facebook would have considered Instagram a direct competitor in its early days, largely owing to its model of deferring network creation.

How to create a network in stealth mode
Instagram started off as a standalone tool. In doing so, the product provides ‘single-user’ utilityto the user even when other users aren’t around on the network. There are two aspects to building single-user utility:

1. The single-user utility should allow creation of content that will ultimately form the core of the network. The core of Instagram is pictures. Discussions are centered around pictures. Hence, the single-user tool needs to allow creation of pictures. This is an extension of the OpenTable model, where a restaurant first manages its real-time seating inventory on a single-user tool, before that very inventory is exposed to consumers on a network, to allow them to reserve tables. Curation-as-creation products like ScoopIt and Storify also use this model to curate content which will serve as the core for network interactions.

2. The product should deliver greater value when users share their content with their friends. The product builds out the network at the backend as more content is shared. Hence, the social network gets created, effectively solving the chicken and egg problem. A new breed of curation-as-creation startups (Scoop.It, Paper.Li etc.) is gaining traction on a similar model.

The new playbook for creating social products is essentially the following:

  1. Have a vision for creating the network but do not start executing on network creation
  2. Enable a single-user tool that creates content that is core to social interactions
  3. Share this content on external networks (social networks, email, blogosphere)
  4. Capture interactions around the content to build network linkages at the backend
  5. Open out the network once a critical mass of linkages have been built

The rise of the content portfolio
Instagram demonstrates how a network is created around a portfolio of user-generated content. Behance and Dribbble have followed similar strategies by providing a portfolio for hosting designs, before adding value through the creation of a peer-review community. Initially, Pinterest appealed to the designer community as a tool to ‘bookmark’ their favorite designs, before it built out the network. Early adopters found enough value in the ability to store designs and pictures, to use the product before the network became active.

The new success factors
Frictionless sign-up and virality are important but they are no longer the key to building social products. The following are key to building content-first social products:

  1. Removal of barriers to the creation of content: Startups like Instagram, which succeeded in simplifying the creation process and in enabling users to spread the word, succeeded in eventually building the connections between users.
  2. Growing the creator base, not just the user base: Since value for the overall networks is scaled by scaling content creation, the platform needs to focus on incentivizing and increasing the percentage of users who create content.
  3. Strong curation models: Content-first social products scale well only when there is a strong curation model in place to separate the signal from the noise. Without strong curation, greater content can actually lead to a poorer user experience leading to reverse network effects.
  4. Incentives: The platform needs to encourage users to build out the connections. This works best when the platform encourages an innate motivation (self-expression or self-promotion) in the user to spread the word about her content. In doing so, the users build the necessary connections that set up the network.

The new growth hacks
In the connections-first model, the one hack that minimized friction in building connections was the contact list integration. In the content-first model, the hack that minimizes friction in creating content is the creation widget. Creation widgets have grown in popularity in recent times, spreading across the internet in the form of browser add-ons and one-click buttons. Several curation-as-creation startups like Pinterest and Scoop.it have used widgets to enable users to create content easily.

The future
This new model of building networks allows a social product to gain traction while value is being created by users. Once enough content is created, the users are connected and the network builds out. Social products that win will focus on enabling users to create content first and generate conversations around it. The creation of the actual social network will be a final step, as a consequence.

Note: This article was first featured on Sangeet’s blog, Platform Thinking (http://platformed.info). Platform Thinking has been ranked among the top blogs for startups, globally, by the Harvard Business School Centre for Entrepreneurship.